One of the biggest reasons most people choose to refinance their vehicle is to land lower monthly payments. If you’re also one of them, here’s what refinancing can mean for you.
A lower monthly payment may help you manage your finances better, but it also means more money going out of your pocket over the loan’s lifespan. Hence, here are some important factors to consider before refinancing your auto loan.
What Are the Requirements for Auto Refinancing?
Since requirements vary from lender to lender, it’s important to understand what you’re settling down for. For example, you may be a credible candidate for certain banks but not others due to different credit scores and financial profile requirements.
Some banks may offer an auto loan refinance if your car has less than 120,000 miles on it, while others may not. This is why it’s important to shop around and make comparisons before settling for a deal.
What Interest Rate Is the New Lender Offering?
While the ultimate goal is to land lower monthly payments, it’s also important to seek a lower interest rate. This is because lower monthly payments often mean your loan duration is prolonged.
A prolonged duration further entails that you may end up paying more interest over the life of the loan. Hence, the lower the interest rate you land, the lower you’ll end up paying in the end.
Ideally, a short loan duration accompanied by a lower interest rate may just be the best combination to look for in an auto refinance deal but remember not to have unrealistic expectations. At the end of the day, your aim is to find a deal better than the existing one and be able to manage your finances well.
Has Your Credit Score Improved?
It’s time to address the elephant in the room. No matter how much we set it aside, our credit score plays a key role in determining the new loan terms. If your credit score hasn’t improved since you took out the first loan, it’s better to work on it before considering auto loan refinance. This is because there is a greater chance you may not be able to get the ideal terms (lower monthly payments) in your refinance deal with a bad credit score.
The Bottom Line
High monthly payments can take a significant toll on your pocket. However, while lower monthly payments help lower the burden for a while, they may not be a permanent solution, especially if the new interest rate is the same or higher than the last one.